What is Salary ?.
Income under heads of salary is defined as remuneration received by an individual for services rendered by him to undertake a contract whether it is expressed or implied. According to Income Tax Act there are following conditions where all such remuneration are chargeable to income tax:
When due from the former employer or present employer in the previous year, whether paid or not
When paid or allowed in the previous year, by or on behalf of a former employer or present employer, though not due or before it becomes due.
When arrears of salary is paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it relates.
What Income Comes Under Head of Salary:
Under section 17 of the Income Tax Act, 1961 there are following incomes which comes under head of salary:
Salary (including advance salary)
Income From Provident Fund
What is Leave Encashment:
Leave encashment is the salary received by an individual for leave period. It is a chargeable income whether he is a government employee or not. Under section 10(10AA) (i) there is also a provision of exemption in case of leave encashment depending upon whether he is a government employee or other employees.
What is Annuity:
It is an annual income received by the employee from his employer. It may be paid by the employer as voluntarily or on account of contractual agreement. It is not taxable until the right to receive the same arises. Under section 56, Income Tax Act, 1961 other annuities come under a will or granted by a life insurance company or accruing as a result of contract which comes as income under from other sources.
What is Gratuity:
It is salary received by an individual paid by the employee at the time of his retirement or by his legal heir in the case of death of the employee.
What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary. Under section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few condition where they are entitled of deduction/ exemptions.
Under Income Tax Act following types of allowance are defined
House Rent Allowance:
Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by an employee paid by his/ her employer as a rent of his/her house. It is a taxable income. There is no exemption in tax if he is living in his own house or house for which he is not paying rent. There are following types of amount which are exempted from tax:
Actual house rent paid by that individual
Rent paid for the accommodation over 10% of the salary
50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary in it is placed in any other city
It is the amount paid by employer for availing entertainment services. Under section 16(ii) of Income Tax Act, 1961 it is entitled to deduction in tax from is salary. But in this case deduction is given to his gross salary which also includes entertainment allowance. Deduction in tax against this allowance can be divided into two parts :
In case of Government employee entitled to minimum deduction of
Entertainment allowance received
20% of basic salary excluding any other allowance
In case of other employee entitled to minimum deduction of
(a) Entertainment allowance received
20% of basic salary excluding any other allowance
Entertainment allowance received during 1954-1955
Other Special Allowances
Children Education Allowance
Tribal Area Allowance
Hostel Expenditure Allowance
Remote Area Allowance
Compensatory Field Area Allowance
Counter Insurgency Allowance
Border Area Allowance
Hilly Area Allowance
Allowances for there is a provision of exempt in income tax are:
Allowance given to a citizen of India, who is a government employee, for rendering services outside India
Allowances given to Judges of High Courts
Allowance given Judges of Supreme Court
Allowances received by an employee of UNO
What is Perquisite
Under section 17(2) of Income Tax Act, 1961 perquisite is defined as:
Amount paid for the rent-free accommodation provided to the assessee by his employer
Any concession in the matter of rent respecting any accommodation provided to the assessee by his employer
Any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:
(a) By a company to an employee, who is a director there of
(b) By a company to an employee being a person who has a substantial interest in the company
(c) By any employer to an employee whose income under the head Salaries exceeds Rs.24000 excluding the value of non monetary benefits or amenities
(d) Any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee
(e) Any sum payable by the employer whether directly or through a fund, other than a recognised provident fund or EPF, to effect an assurance on the life of the assessee or to effect a contract for an annuity
There are following perquisites which are tax free:
Subsidised Lunch/ Dinner provided by employer
Facilities For Recreation
Products at concessional rate to employee sold by his/ her employer
Insurance premium paid by employer
Loans to employees by given by employer
House without rent
Residence Facility to member of Parliament, judges of High Court/ Supreme Court
Conveyance to member of Parliament, judges of High Court/ Supreme Court
Contribution of employers to employees pension, annuity schemes and group insurance
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